What started out as a normal correction in stock prices has morphed into something worse for almost every sector that is economically sensitive. Technology, industrial and bank stocks have now all entered bear market territory. As you know, over the past six weeks, we have reduced your exposure to these sectors to avoid risk, should this downward trend continue, which it might. This has caused the amount of cash in your account to accumulate in money market funds. You may be wondering, “Why do I have so much in money market funds and when will it be re-invested? Is it safe to get back into stocks right away?” Let’s discuss.
Our higher exposure to money market funds is a very temporary position. Think days or weeks. As they say, “in tough markets, cash is king” and this is a tough market. When it comes to managing your money, we always take the stance of “it is better to be safe than sorry” to avoid catastrophic declines, even if it means missing a few days of a rising market. If the bull market survives this abnormal correction and begins to act better, we will be redeploying these funds back into companies we think will lead the market higher. As we discussed in our previous Strategy Update, this will be a different group of stocks than the winners of the past two years. We already have a great list of stocks to buy for you should the market get on better footing.
It is possible that global stock markets may need to go lower before stabilizing, in which case the money market balances will cushion your portfolio from further declines. If it appears that we are entering a full-blown bear market similar to 2008, we will reinvest these funds in safer, higher yielding securities until the “dust settles,” which can take months.
We will be watching several economic and geopolitical data points over the coming days and weeks that may give us more clarity. The Federal Reserve, G20 Summit and ongoing tariff negotiations are important factors we will be watching closely. In the meantime should the market go lower, keep in mind we have already reduced the risk of your portfolio significantly.
During the year we have sold a number of stocks after large long-term gains. Many of these stocks have fallen since our sale and may fall even further should the entire market tumble into bear territory. Though taking profits is a good idea ahead of a bad market or even during a good one, it does generate capital gains taxes in your taxable accounts. While we always strive to tax-loss harvest in the most performance oriented and tax-efficient manner, there may be no way to completely avoid taxes. Paying taxes is no one’s favorite thing to do, but when it comes to reducing risk it is better to pay thousands (in taxes) to avoid losing millions (in market value).
We hope this short update is helpful during this volatile period. Keep in mind that our team is prepared to act on your behalf should the market turn for the better or the worse.
Your Team at Main Street Research